What it means
Law and professional standards recognise three types of wrongful conduct that are often confused with one another. Misfeasance is doing a lawful act in an improper or negligent way.
Malfeasance is doing something unlawful, and nonfeasance is failing to act at all when there was a duty to do so. The key word is duty.
A bystander who fails to help a stranger generally has no legal duty, but a company director, an accountant, a trustee or a manager does have duties to the people they serve, set by law, contract or professional rules. If they sit back and let a problem develop when action was required, they may be liable for the harm.
In a business setting, typical examples include a finance officer who does not file required tax returns, a director who ignores signs of fraud, a trustee who fails to invest a fund's money, or a manager who does not renew a vital insurance policy. In each case the harm comes from inaction.
Courts have often treated nonfeasance more cautiously than misfeasance, because it is harder to say that a person caused a loss by doing nothing. Even so, professional bodies and regulators can discipline people who neglect their responsibilities.
The claimant has to show that a duty existed, that it was breached by the omission, and that the omission caused a measurable loss. For organisations, the sensible response is to turn duties into routines.
Calendars for filing dates, written delegation of authority, regular reporting to the board and clear job descriptions all reduce the risk of important things being left undone. Directors and officers insurance may respond to claims alleging failure to act, but it has limits and exclusions.
The rules vary by country, so legal advice is wise whenever a serious omission may have occurred.
In practice
Real-world examples.
Example
A company secretary forgets to file the annual accounts with the registrar, and the company is fined $15,000. The failure to perform a legal duty is nonfeasance. The fine is a direct cost, and the company's credit rating may also suffer.
Example
A trustee of a family trust leaves $500,000 in a bank account earning nothing for years despite a duty to invest prudently. The beneficiaries lose growth and can claim that the trustee failed to act. If a prudent investment would have earned 4% a year, the lost growth after three years is roughly $62,000.
Example
A facilities manager is told that the fire alarm system is faulty but does nothing for months. When a fire occurs and damage reaches $2,000,000, the company's insurer questions whether the cover is valid. The manager's inaction becomes the central fact in the dispute.
Case study
Seen in the real world.
Dunmore Supplies is a fictional wholesaler invented to illustrate this idea. Its finance director, Helen, knew that the company's payroll tax payments were behind schedule but kept putting off the task during a busy season.
After nine months the tax authority issued a demand for $180,000 of unpaid tax, plus interest and penalties totalling $32,000. The board discovered that nobody had been assigned to monitor tax deadlines and that Helen had not warned them. Several of the directors admitted that they had not asked for the filing status in their monthly meetings.
The board changed the process, adding a compliance calendar, a monthly report on filings and a rule that missed deadlines must be escalated within a week. A review concluded that her failure to act was nonfeasance, and the company considered whether it could recover part of the cost. The board also reminded all senior staff that a duty to act continues even when the workload is heavy.
Watch out
Common mistakes.
- Assuming inaction is always safe. Where a duty exists, doing nothing can create liability, and "I did not know what to do" is rarely a defence.
- Confusing it with misfeasance. Nonfeasance is not acting at all, while misfeasance is acting badly. The legal consequences and the defences available can differ.
- Believing that only individuals can commit it. Organisations can also be held responsible for failing to perform duties, for example where a company does not carry out a safety check required by law.
Questions
People also ask.
What is the difference between nonfeasance, misfeasance and malfeasance?
Nonfeasance is failing to act, misfeasance is acting improperly and malfeasance is acting unlawfully.
Does every omission count?
No. There must be a legal or professional duty to act, and the omission must cause loss. A manager who misses an optional training session has not committed nonfeasance in this sense.
How can a company reduce the risk?
It can set clear responsibilities, track deadlines, document decisions and give regular reports to the board. Written procedures also make it easier to show that the company took its duties seriously.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related